German Chancellor Angela Merkel, who has long resisted monetary support for the indebted Mediterranean nation, said today that the European Commission, the European Central Bank, and the International Monetary Fund still needed to determine if a bailout for Greece is necessary.
And even then, she told reporters here today, Greece would need to fulfill "very stringent conditions" and establish a “credible savings program” to be eligible for the aid.
Other German officials reiterated Merkel’s point, saying that any aid package to Greece would come with numerous conditions and as a last resort to rescue the euro. Michael Offer, spokesman for German Finance Minister Wolfgang Schaeuble, said that experts still needed to confirm whether Greece needs the aid.
Greece's request for aid was a sharp reversal of course from earlier assurances that Greece did not need a bailout. Prime Minister George Papandreou today called his country a "sinking ship" and requested $56 billion from the European Union and the International Monetary Fund. The request came one day after Greece revealed that its 2009 budget deficit is 13.6 percent of the Greek gross domestic product, higher than the 12.7 percent the country had originally claimed, and well over the EU's 3 percent ceiling.
This latest revelation further undermined investor confidence in Greece’s ability to make the difficult spending cuts necessary to reduce its deficit. After the announcement, Moody’s rating agency downgraded Greek bonds for the second time in the past five months, pushing interest rates on two-year Greek bonds to an astonishing 11.5 percent, nearly the same rate as for Pakistani bonds. Such high rates make it virtually impossible for Greece to raise the money necessary to make tens of billions in loan payments due in the coming weeks.
“The moment has come,” Papandreou said in a nationally televised speech this morning. “Today, the situation in the markets threatens to deconstruct not only the sacrifices of the Greek people, but also the smooth course of the economy.”
Now, the IMF and European Union officials are meeting in Athens to negotiate specifics of the bailout plan. It is not clear how long negotiations will take.
"We have been working closely with the Greek authorities for some weeks on technical assistance, and have had a mission on the ground in Athens for a few days working with the authorities and the European Union. We are prepared to move expeditiously on this request,” Dominique Strauss-Kahn, managing director of the IMF, said in a statement.
European contributions unclear
EU member states, which agreed in principle to the bailout package, have yet to determine exact amounts each nation will contribute. Financial expert Frank Schaeffer of Germany's Free Democratic Party estimated Berlin would need to give than $40 billion. But so far, only Spain has publicly stated their support to activation of the bailout package, pledging $4.8 billion.
“Today we got the good news that Greece has asked for the aid that the EU has set aside and what we hope for is that the agreements of EU and IMF support are put into action as soon as possible so as to bring tranquility to the markets,” Spanish Deputy Prime Minister Maria Teresa Fernandez de la Vega in Madrid said today.
As the extent of Greece’s financial troubles emerged in the last five months, a bailout seemed increasingly inevitable. Each time the EU pledged support, investors reacted positively in the short-term, but eventually soured on Greece as new financial problems were discovered.
These discoveries have left the Greek economy on the brink of ruin, and a failed Greek economy would have negative repercussions across the euro zone.
“The markets have not been persuaded that Greece will not default,” says Mitchell Orenstein, a professor of European Studies at Johns Hopkins University School of Advanced International Studies in Washington. “Given the size of the cuts required, this could put the Greek economy into a tailspin and make it difficult to impossible for it to grow its way out of the debt problem.”
Germany is key
But Germany, which is Europe’s largest economy, is key to any bailout. Since the crisis began late last year, investors have looked to Germany for an indication that it backed a bailout plan for Greece.
Yet Merkel’s comments today are the strongest indication yet that EU members are far from agreement on if and how aid should be provided. Since the crisis began, Merkel has been reluctant to offer guarantees that Germany would provide aid to Greece for number of reasons.
A bailout of any size could prove politically disastrous for the chancellor. Four out of five Germans oppose any bailout of Greece, and opposition parties have made the bailout a key issue in the May 9 regional election that could seize control of the Bundestag away from Merkel. Without majority in parliament, Merkel would have difficulties advancing her political agenda in the coming years.
Also, Germany does not want to set the precedent of being the financial backstop for fiscally irresponsible EU member states. Spain, Portugal and Italy also face questions about whether they will be able to pay off their large debts.
The German parliament, which is meeting on Monday to discuss the bailout request, must approve any aid. German lawyers have threatened to challenge the plan in Germany’s high court on the grounds that direct aid from one EU member to another is forbidden by EU regulations.